The prognosis for the Economy and Unemployment

The Sunday news talk shows had Treasury Secretary Tim Geithner and Larry Summers as featured guests. What was most evident from both of their conversations was that we have a long time before a real recovery takes place. For example, Geithner said unemployment would "ease" in the second half of next year. Geithner also said that extending unemployment benefits again is something the administration and Congress are going to "look very carefully at as the end of this year approaches." Well, to me that means two things: First, unemployment will rise for a full year from today and with it so will unemployment benefits, not just for the additional 13 weeks being contemplated now. Currently the unemployed are eligible for a total of 79 weeks of unemployment. Add a minimum of 13 additional weeks and you get 92 weeks of paid absence from a job. My God, that is almost 2 years! And those without jobs have at least another year of looking for a job before things look better for them. Consider what these means for the possibility of even more foreclosures.

Everyone believes the Consumer is not spending today but has increased savings. This also says there is most likely systemic changes in the patterns of Consumers behaviors that may be generational in duration. I can imagine a smaller footprint spending form the Consumer and a larger footprint needed by Corporations or Government to pick up that slack to help increase GDP. I saw a formula for GDP this morning while pursuing the Blog articles which said that GDP=C+I+G+(Trade Surplus or Deficit) where C is Consumer spending, I is for investments and G is government spending. You can see from the equation that the biggest part of GDP is going to come from Government (or us) and we are borrowing from the future of our children, kids and grandchildren and dooming them to less of a life to pursue the American Dream than any other generation of the past except from the Great Depression years. How can we look ourselves in the mirror and allow this to happen, you ask? Easy, as this generation of "What's in it for me" Americans, we don't really look in the mirror much and do the self reflection thing very well. We are so focused on ourselves, we have lost morality and sold our souls to the average bidder. Boy, the last 8 plus years have surely screwed up this country so badly, we may never recover. So when you hear the "good news" on better GDP, remember it is the Government spending driving it, not business and not the Consumer for the next few years. Don't be fooled that things are looking better. Make sure you look at the Unemployment rate and keep looking at the number of Home Foreclosures and Business and personal bankruptcies.

The seeds of our destruction were sown many years ago and most likely back in the Reagan Administration, (See the chart below from ZFacts.com with a great article that goes along with the chart) where Federal Deficits had new meaning. Ever since then, we have been going out of control. Twenty out of the past 26 years since 1982 when Reagan was President, Republicans have been in control of the Presidency. You will notice on the chart below, it was Clinton who actually turned this trend around only to be reversed again by George W. Bush.

Market news and outlook April 29th

Major data was released this morning on GDP. For the first Quarter GDP was down 6.1% and this is the 3rd consecutive quarter of negative GDP. Exports for Q1 were down 30%, the lowest since 1969, while Imports were down 34%. Consumer Spending increased 2.2%. Inventories declined 2.7%. Home Investments showed a 38% decline and Business Investment in Structures was down 44.2%.

In Pre-market the news seems to be shrugged off, as Futures are still positive with the Dow up 71. Watch the market carefully today, as we may have the breakout many of us have expected. I happen to think it has a higher probability of dropping than going up, but I am right only about 67% of the time. To me the news is very bad and I don't see why the market is still up. It was significantly less than the -4% GDP expected.

I asked myself if I have changed my spending patterns recently since the scary market decline and I would have to admit only slightly. I still go out to local restaurants, but since I don't need any new equipment or appliances, I am not really spending much.

The Swine Flu seems to be growing at a relatively slow pace, which is good. The first U.S. death was reported in Texas today of a 23 month old toddler. Hopefully this scare will dissipate and the concern lessoned. We don't need this crisis on top of all the crisis we still face. The large Banks are still very much in trouble and the release of the Stress Tests on the top 19 Banks will be announced on Monday. So the market seems to be waiting, apparently frozen at current levels. Today is also President Obama's 100th day in office and the general tone from that should be good with him garnishing a 69% approval rating.

BANK OF AMERICA HOLDS THEIR SHAREHOLDERS MEETING TODAY AND THE VOTE TO KEEP THE CEO KEN LEWIS WILL MAKE NEWS EITHER WAY. Many expect him to be outed by angry shareholders. Quite honestly if he is outed as CEO it is difficult to predict the market's reaction on Citi stock but I have bet that Banks share prices will drop going forward so we shall see what this meeting does today, to that end.

I remain pessimistic regarding a market advance. I believe this rally has been a Bear Market Rally and not the beginning of a new Bull Market. There is an emerging Commercial Real Estate crisis added to the home foreclosure problem still front and center, with each additional layoff contributing to more foreclosures in the system. Next week April Unemployment numbers will be released which will heighten the concern. Layoffs are still in the mind of Executive decision makers in many if not all businesses. This is not a good sign. Preserve Capital until the picture of the future shows more promise.

Don't forget to vote in the Mini Poll on how long the recession will last on the right margin. Vote only once per month. data will be summarized next week.

Pre-market Monday, Dec. 8th, 2008: Is the rally real?

Many of my friends don't believe the rally is for real. But many counter with the fact that the stock market is a leading indicator and usually 6 months ahead of the news. This weekend Congress, President-Elect Obama, along with the Bush Administration, have worked out some differences on a bailout for the Auto industry. Markets in Europe and Asia all had big rally's overnight and in the early hours. So it seems as though we are off to the races at the open, and you can expect a significant rally up about 300 points early in the day.

But again, is this enough to dispel the market overall fear? The answer to me is No! Most of us believe that more jobs are going to be lost going forward, more home foreclosures, tight credit and not much good news. So this rally is a relief rally based upon the worst news any could imagine from the bad jobs report last Friday, where 533,000 jobs were lost, behind us and no other news expected for a while.

So what to do. Well, first don't sell your Ford stock. Enjoy the ride today, as it will go up to $3.50 today for a nice gain. And because of the bailout, it will continue to $4 and above per share. If you believe as I do, that there will be a pullback eventually here and retest the lows, you are going to be given another opportunity to by the ETF Ultra Short fund, symbol SDS for around $83/share. If you buy this here you will most likely make a good return. So folks who believe we are in a Dow range between 7,300 and 9,500 will be looking to add to our Short positions using ETF Ultra Short funds. Yes, we may rally for a few days this week, but ask yourself this question, Are we going to have the worst of this financial crisis behind us 6 months out?

UPDATE 1:15pm PST.
I took my own advice today and purchased more shares of SDS, this time at $80.50/share with a limit order in for that price before I left for a client. The shares of SDS actually hit a low of $80.06 today. Ford closed up as well at $3.38/share after hitting $3.54 today, which was another lucky guess.

Helping to reduce foreclosures is possible with compromise by all affected parties.

I have been giving some thought recently about what to do about those who had sub prime mortgages and find themselves facing foreclosure. The object being how to do the best to keep the most number of people in their homes and the fewest foreclosures, all this without having to lower the value of the home. It is a monumental task indeed, but it is a huge problem facing the very survival of our economy and financial institutions.

So I have made some assumptions necessary for the solution to be acceptable to all those involved, including the Homeowner. Here are the assumptions I made:

• The mortgage amount of the loan stays intact at what the purchaser borrowed.
• The length of the loan terms would be extended to the maximum.
• The originator of the loan must only repackage the loan and sell it either to Freddie Mac or Fannie Mae and would be owned by the Government similar to FHA loans.
• The percentage interest of the loan would be set the lowest interest rate from the past 25 years.
• The owners must be occupants of the homes. No subletting or renting allowed.
• Down payments on these homes were 15% on average.
• The length of the loan terms will be extended to 50 years from the current 30 years.
• Medium Home prices by region are assumed to be as follows:
West $253,600
Northeast $246,800
Midwest $152,500
South $167,200. All these figures were as of Nov. 4, 2008 and can be checked here.

So if one assumes thew average price of a home to be $200,000 for loan calculations and that no principal has been paid on these loans, then various monthly payments can be calculated.

Here are some possible mortgage payments:

This would compare to 6.5% for 30 year current mortgages for a loan of $200,000-$30,000 (15% down payment) or $170,000 mortgage of a monthly payment of $1,074.52

With these sub prime loans set to 4.3% for 50 year mortgages for a loan $170,000 mortgage of a monthly payment of $ 689.83.

When I look at these numbers it would make a significant difference to a home owner facing foreclosure, because it is a reduction of $384.69/month in the payments or a 35.8% reduction in monthly payments. I picked the 4.3% interest rate because back in the mid 90's banks had interest rates that low on mortgages. This reduction could make all the difference in the world, to a struggling homeowner and their family.

I know the homeowners will never pay off their homes here, but if they can still occupy them, and, given time, with house appreciation, they could sell their homes for some money back some day. Besides, how many of us really pay off our mortgage before we are ready to sell and move to another home? Not many I assure you. At least this is a solution. You have any better ideas? I am open to hear them.

Are you ready to exert your power in this Election?

They say Barack Obama is caught between a rock and a hard place regarding the weekend comments by Rev. Wright at the NAACP meeting and other media events. They want us to believe that even though Barack has admonished his former pastor's comments, the American people will blur them together including each of their positions with no distinction. When they still haven't made up their mind who to vote for, they will acquiesce and vote for Hillary. If that is so, then the American people will get who they deserve for President.

It is my firm belief that there is at least 30% of the American people who don't think at all. Those are the ones who still approve of President Bush's policies in Iraq and here at home. They are not worth discussing any issue with as they have drunk the Kool-Aid and now are zombies. Then there are about another 15-17 % that will vote for John McCain because he is a Republican. That gets John McCain to 45-47%. The Democrats have given a majority vote for Barack which gives him about 28% and Hillary has about 24%, with Independents the final choosers in the Fall Election. Many Independents have joined with Barack, as they see a new hope not seen since John F. Kennedy.

The only question that truly remains is the following: Are we going to let the media dictate the issues we talk about during the next 6 months? If so then we will decide the election based upon associations and distractions, rather than substantive issues like the war in Iraq, getting a better Energy policy that helps liberate us from the dependence on Middle East Oil and our own Oil companies, giving tax breaks for Middle and low income people and increasing the tax on the wealthiest, helping to solve the Social Security financial crisis by ensuring it is there for our next generation, paying down the National Debt, solving the home foreclosure and subprime loans problem for so many Americans, passing a GI Bill to help support the troops who have given so much for their country, and so many other issues on foreign policy to help restore America's greatness in the world. This is up to us, not someone else. Change the channel of your TV when you here anything that isn't real issue oriented, with the emphasis on the word REAL! When the media ratings drop, maybe they will do something better, like cover real issues. If you speak to others about the Primary, discuss issues, not distractions. Start speaking out about what you want this election to be about or we all lose. And when we lose, the rest of the world does too. Remember, only we can give power to Swift Boat ads when we listen to them and alter our positions as a result.

UPDATE:

I almost forgot this action. Anyone, in the remaining States to still hold their Primary, should help end this folly, by voting overwhelmingly for Barack Obama. That will at least stop the rhetoric till September.